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Chocolate Emporium, Inc.

Paul Scott, a small business counselor, put down the receiver after speaking with Jon Lewis, a new client. Lewis was scheduled to come into the office in two hours to discuss the situation with his new business venture. Jon Lewis was referred to Scott by a mutual friend. Lewis’s new business, Chocolate Emporium, Inc., was experiencing some difficulty. The situation wasn’t unusual; most new businesses do experience some early difficulties. Paul Scott agreed to perform an analysis of Chocolate Emporium, Inc., and its market. As Paul reviewed the information he had gathered on Jon’s business, her realized a two-prong attack was needed in order to make a go of the business: a) increase revenues and b)decrease costs. He also realized that abandonment was an alternative.

BACKGROUND INFORMATION

Jon Lewis worked for 15 ½ years in insurance (sales and agency management) before deciding to engage in his present venture, Chocolate Emporium, Inc. His insurance job, which required extensive traveling throughout the Midwest, restricted his family life. Jon chose a medium-sized-populated (53,000) Midwestern college town as the location of his business. This type of environment closely resembled that of his youth. Jon liked the schools and the accessibility to a larger metropolitan area 35 miles away. Of greater importance though, was the fact that the location Jon chose had no major chocolate specialty shops. Jon began researching the idea of a chocolate store approximately two years before he actually opened the doors of Chocolate Emporium, Inc. The initial idea of a chocolate store was based on two successful examples that had been operating in his hometown. One of these chocolate stores in particular was appealing to Jon. Jon was attracted to the “sit down” and “family” image the store portrayed. It was this image that Jon hoped to replicate in his own chocolate store. With this image in mind, Jon prepared to start up his business.

Source: The research and written case information were presented at a Case Research Symposium and were evaluated by the Case Research Association’s Editorial Board. This case was prepared by Alan Aidiff and Marilyn Taylor of the University of Kansas as a basis for class discussion. Distributed by the Case Research Association. All rights reserved to the authors and the Case Research Association. Permission to use the case should be obtained from the Case Research Association. Used by permission of Marilyn Taylor and the Case Research Association.

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Site Analysis

Jon was aware that pedestrian traffic would be an important element in the future success of his venture. He contacted the local Chamber of Commerce to get information on the shopping areas and pedestrian traffic patterns. In the particular town he chose to begin his business, there were no shopping malls. After observing several areas of the city, Jon decided the downtown area was his best bet. From the start, however, he encountered problems of high rent, long leases, and dilapidated premises. All available sites downtown were eliminated for one or more of these previous reasons. Alternatives to the downtown area were then considered. The alternatives included several free-standing buildings which housed one or more shops/stores. After six months of searching for a site, Jon learned of a new shopping mall under construction along a major trafficway. The mall was located in the southern part of the city. Jon viewed this location as important since much of the growth in the city had been in that direction over the last five years. Jon ultimately selected a corner location in the mall (see Exhibit 1) due to favorable lease provisions, year-round access, and new physical facilities. In addition, Jon was anticipating that the other stores would draw customers and enhance customer traffic around his store.

Competition

Jon wanted the Chocolate Emporium to be a retail store for high quality chocolates and candy. As Jon’s market research progressed, he became more convinced that chocolate and candy sales were seasonal that he could expect sales peaks primarily during the holiday seasons. He began to consider extending his product line to include soda fountain items. This aspect of the business was not initiated until after the specialty shop opened. Thus the product lines of the Chocolate Emporium eventually included chocolates, candy, and fountain items, e.g., ice cream and carbonated beverage items.

A factor underlying Jon’s decision to choose the Midwestern college town was the lack of direct competition in the local chocolate market. However, there were several competitors in the candy and soda fountain markets. Jon felt that his primary competition would be:

· The Candy Store – The Candy Store carried very few chocolates and sold mostly candies. The store was located in the downtown area and was privately owned and managed. The Candy Store was probably the only direct competition in candy sales for Chocolate Emporium.

· Dairy Queen – Dairy Queen was known primarily for its fountain operations and had recently increased its efforts in the restaurant segment of its operation. DQ had a long tradition in the area of fountain operations. The stores were located east and south of Chocolate Emporium and were franchised operations.

· Baskin-Robbins – Baskin-Robbins was solely a fountain operation. The name Baskin-Robbins was associated with 31 flavors of ice cream and was likely to have repeat customers. The store was located east of Chocolate Emporium on the same trafficway and was a franchise operation.

· Zarda Dairy – Zarda Dairy had extended its market segment to include convenience stores with ice cream and fountain items provided by the dairy operation. Zarda Dairy was located in a nearby metropolitan area and was privately owned/managed. The store was located west of Chocolate Emporium on the same trafficway.

· Perkins – Although Perkins was primarily a restaurant operation, it did carry a limited selection of ice cream and fountain items. In addition, Perkins had recently promoted a market campaign highlighting the variety of desserts on its menu. Perkins was a franchise operation located across the parking lot from Chocolate Emporium.

There was also indirect competition from the local grocery stores. All the local grocery stores carried a variety of candies and chocolates, although the chocolate lines were not as widely varied as those at Chocolate Emporium. The major difference in the candy was that the grocery stores sold prepackaged candies whereas Chocolate Emporium weighed out what the customer wanted to buy. Jon preferred this personal touch.

Market and Retail Preparation

Jon had no previous retail experience. He felt “very good about his ideas and their prospects” but realized a positive attitude alone was insufficient. Before deciding to start an independent operation, Jon searched for franchise opportunities (see Exhibit 2). After investigating several options, Jon decided to remain an independent operator and explore the chocolate market on his own. Jon contacted suppliers of various chocolates and candies. During this time he became closely acquainted with the manager of a chocolate retailer in a nearby metropolitan area. This particular retailer was owned by a chocolate factory in the same area. Ultimately this factory became Jon’s major supplier of chocolates. Jon arranged to work at the retail outlet 2 – 3 days per week for 6 months. During this time he learned as much about the retail operation as possible.

EXHIBIT 2

Potential Franchises Explored by Jon Lewis

Name of Operation Results of Investigation

1. Godiva Very expensive chocolates (specialized in box chocolates). Did not have a bona fide franchise arrangement. Would have had minimum space and inventory requirements. Cost prohibitive (@ $14/lb).

2. Russell Stover Were not providing for franchise arrangements at time of investigation. Anticipating change in near future and willing to discuss franchise arrangements at that time.

3. Hershey’s Did not provide franchises for retail operations. Was willing to sell carload quantities for retail sales

4. Swenson’s Originally Jon wanted access to ice cream vs. bona fide franchise. Price negotiations fell through. Had to withdraw and seek other sources.

5. Haagen Dazs Wanted to provide exclusive ice cream dealership; no chocolate or candies. Withdrew due to above restrictions.

The retail outlet that Jon worked with was located ina large shopping mall which had opened in the heart of the metro area (population about 2 million) about five years prior. Pedestrian traffic in the mall was brisk all year. Jon noticed that frequently people would “browse” at the different candy and chocolate counters. The retail outlet also had many return customers. The manager told Jon that some of their customers had been regular patrons as long as she had managed the store. It was Jon’s hope that he could replicate this type of business in his small retail store.

During this six month period, Jon attended several chocolate and candy conventions. He enjoyed “discussing products with the suppliers and prospects for the future.” Jon became very knowledgeable about the chocolate industry. He arranged to receive specialty items not available through his major supplier. Eventually his sources of supply included chocolate and candy producers located across the United States. He prided himself on his ability to locate suppliers and expanded the types of chocolates and candies he carried in stock. In the case of the fountain and ice cream product line, Jon relied solely upon one supplier. His rationale was that these items are refrigerated and the closer the proximity of his supplier the less problem with shortages and spoilage. Jon had had no problem with back orders from any of his suppliers.

Jon could usually rely on delivery of goods within a week of when they were ordered. Given the close proximity of his major chocolate and dairy suppliers, he could receive goods sooner if he personally picked them up. The terms were cash on delivery. Since Jon was a newer small retailer, his suppliers were hesitant to extend credit. Jon hoped his suppliers would eventually extend more favorable credit terms.

Financing of the Business

Jon was able to acquire financing for his venture through a local bank. Initially, Jon provided 30% of the outlay costs through personal investment. The remainder was acquired through debt capital. Of the debt financing 10% was a personal loan from a relative and the remainder was a bank loan. The collateral for the bank loan was in the form of Jon’s personal portfolio of stocks and bonds.

CURRENT SITUATION

In talking with Jon Lewis, Paul Scott was impressed with his knowledge of the chocolate industry. The history and refinement of the cocoa bean frequently entered the discussion. This entrepreneur was fascinated with the industry and market he chose to enter. Jon Lewis was the epitome of the entrepreneur: enthusiastic about his product and energetic (usually working 60 or more hours a week).

Shopping Mall Status

The shopping mall site Jon chose had been vacant for two years prior to his lease arrangement. In discussing this fact with the developer, Paul received no apparent explanation. The developer simply explained “the retail interest originally anticipated never surfaced.” At the time of Paul’s analysis, the mall was about two-thirds occupied (see Exhibit 1). The occupants included the following:

· 4 small specialty shops (118, 115, 104, 105)

· an electronics store (109)

· a video game center (108)

· a large nightclub (210-215)

· a travel agent (201)

· a flower shop (202)

· a fitness center (204

· Jon’s chocolate/fountain shop (205)

In addition, a cafeteria was under construction in the east end of the mall (see Exhibit 1; 203, 207-209). The increase in occupancy was partly due to the efforts of the older occupants. In fact, Jon chaired a committee of current occupants that actively promoted the mall to enlist new retail interest. When asked, Jon knew of no advertising campaign by the developers to promote the mall.

Paul spoke with a colleague about the mall advertising and his colleague related the findings of a demographic study performed by the developers. Paul asked his colleague to comment on the findings of the study:

· The study was geared toward supply of labor rather than toward customers, e.g., can you hire enough workers for your store?

· a study of customer potential was included but did not include area traffic flow.

· Future projections from the study were too high and unrealistic in his opinion.

· the center/mall went into operation with little customer data.

The shopping mall was located adjacent to one of the busier traffic intersections in the city. To the west of the mall was a major department store and to the east a vacant lot. Behind the mall, to the south, were single- and multiple-family dwellings. The entire area south of the mall was zoned for residential use. Across from the mall, to the north, were several “fast food” restaurants. The area north of these businesses, though, was zoned for residential use. Essentially, the mall was part of a “strip development” along a major trafficway.

Paul Scott had visited the shopping mall on a number of occasions. An observation he made was that there were few (if any) people “browsing” between shops inside the mall itself. Paul brought the lack of customer traffic to Jon’s attention and Jon agreed with the observation. Jon expressed concern that a cafeteria was being constructed next to his store on the east side of the mall. He was fearful that people might enter the cafeteria from outside (on the north) and thus eliminate any location advantage he might have (see Exhibit 1).

Facilities

A major advantage of the mall location was its new facilities. The mall had handicap access and restrooms. At the time of Paul’s analysis, one end of the mall was vacant (see Exhibit 1). The other end of the mall was occupied by a clothing retailer. Because new occupants were entering the mall, much construction was still in progress.

Jon did not provide carryout service. He felt strongly about maintaining the “sit down” image. Since the fountain area was a later addition to the business, Jon admitted that it might require redesigning to facilitate an efficient workflow. For example, Jon had over 30 flavors of ice cream but could only display nine flavors at any one time. Jon planned to try to remedy this problem by the next peak fountain season.

Jon also wanted to ensure that he had adequate storage space. Consequently, he had a 10’ by 12’ walk-in freezer installed. Paul noticed that the freezer was only one-third full and discussed the size of the freezer with Jon. Jon stated that he had anticipated a monthly sales level of approximately $25,000 and felt that 10’ by 12’ freezer would provide the amount of storage space necessary to facilitate that level of business. Paul discovered later that nearby Baskin-Robbins store had a 10’ by 6’ freezer. (See Exhibit 3.)

Jon purchased a van truck in order to provide special deliveries for chocolate orders. The van was light blue with the Chocolate Emporium logo on both panels. Jon charged $1 for delivery. He recounted a delivery incident to Paul Scott. On Valentines Day he advertised giving candy as opposed to traditional flower. He received a request for a delivery to a sorority on the university campus. When he arrived in the van, several of the sorority women questioned him about what he was doing and to whom it was to be delivered.

Marketing Efforts

In analyzing Chocolate Emporium, Paul made efforts to focus upon the market area. The city in which Chocolate Emporium was located had a population of approximately 53,000. There was no predominant industry. The business community and the Chamber of Commerce actively promoted the town as an attractive location for businesses to locate. Several Fortune 500 companies had located smaller branches in the area; however, no unit had over 300 to 400 employees. There was a large rural population and many of the rural inhabitants used the city for shopping on weekends. A twenty-year city plan called for improvement of the downtown shopping are to cope with retail traffic. In fact, the City Commission rejected a proposal for a new shopping mall in favor of promoting the downtown improvement plan.

The primary employer in the area was the university, which had about 25,000 students.* There were definite season trends in sales. During the fall, the football games created high potential for business volume. In the summer, however, most of the students returned home. The student population had grown steadily during the 1970s. But in the last two years there had been almost no increase in the number of students.

*About one-third of these were considered residents of the town.

Jon was aware of the importance of advertising and was actively experimenting to find “the answer to his market woes.” He advertised in both the university and the local newspaper, as well as in radio commercials (see Exhibits 4 and 5). He wanted to design an advertisement that promoted a “sitdown” and “family” image. The shopping center had one central sign which had space only for the shopping center name. Each of the businesses had been given permission to hang a banner below the sign for the 30 days following their grand opening. To partially overcome this situation, Jon parked the van every day so that the Chocolate Emporium logo faced the traffic. As previously mentioned, Jon also used

the van for occasional deliveries. This aspect of the business was a minor contributor to sales. So the van usually “ remained parked in its usual spot.” Paul felt that this method of advertising was innovative but questioned its effectiveness. Jon was also experimenting with using the classified ads in the local newspapers and coupon books which were sold by local service clubs.

Financial and Inventory Status

Paul found that Jon kept accurate records but that no summaries, income statement, or balance sheet had been prepared. One of Paulo’s first tasks was to provide an Income Statement and Balance Sheet (see Exhibit 6). Upon completing the Balance Sheet and Income Statement, Paul provided a detailed list of operating expenses (Exhibit 7) and charted revenue by product line. (Exhibit 8) and percentage of revenue by product line (Exhibit 9). Paul also discovered that Jon was four months behind in his rent. In discussing the mall with the developer, Paul discovered that roughly one-half of the occupants were behind on their rent. The developer did not view this as a severe problem since his major concern was to increase the mall’s occupancy.

Paul was curious about the direct expenses/revenues associated with the van purchase. He was able to summarize them as follows:

· Direct Expenses – original cost $12,231 w/3 yr. S. L. depreciation schedule - direct expenses: $3,737 (depreciation )

971 (mostly fuel)

· Direct Revenues - $15-20/month on the average - $150-170 for Easter

The ice cream and chocolates were stored in the walk-in freezer. When reviewing inventory control procedures, Paul noted that orders were based on a stock tally sheet place on the freezer. Whoever took a container of ice cream or a quantity of chocolate from the freezer made notation on the sheet.* Paul could not help but notice that Jon had a large volume of ice cream in stock. In fact, he discovered later that Jon had 3 weeks’ stock on hand. When discussing ice cream inventory with a nearby competitor, Paul learned that the competitor never kept more than a one-week stock of ice cream on hand at any one time. The competition said the inventory level might vary slightly during the summer months. Paul discussed inventory with Jon and discovered that Jon had over 53 suppliers (see Exhibit 10). Further probing by Paul revealed that over one-half of the cost of goods was to regional suppliers (see Exhibit 10.)

*Inventory breakdown: a. Ice cream $1,538 b. Chocolate Candy 4,525 c. Soda Products 169 d. Merchandise 150

e. Packing Materials 901

Personnel

Jon was the only full-time employee at Chocolate Emporium. His only requirement for hiring was that each employee must work more than 10 hours per week. When working, the employees could help themselves to whatever they wanted in the store. Jon had no formal training program for new employees. His turnover was very low and, in fact, only one person had quit in the 10 months the Chocolate Emporium had been in operation.

All of Jon’s help were students who received minimum wage, with the exception of his assistant manager who received $3.65/hour. As Jon put it, “I don’t like to underpay people. I found out that (a nearby ice cream competitor) pays as little as $2.00 an hour to their employees!” The store was manned by at least two people during the hours of operation. (See Exhibit 11.)

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